MAXIMUS, Inc. Form 10-Q Summary
Business context and reporting period
MAXIMUS provides business-process and technology services to government health, human services, employment, and benefit programs. This report covers the three months ended December 31, 2019, the first quarter of fiscal 2020, compared with the three months ended December 31, 2018.
- U.S. Health and Human Services revenue was $312.3 million.
- U.S. Federal Services revenue was $366.6 million.
- Outside the U.S. revenue was $139.4 million.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $818.2 million | $664.6 million | +23.1% |
| Gross profit | $175.5 million | $159.3 million | +10.2% |
| Gross margin | 21.4% | 24.0% | Down 260 basis points |
| Operating income | $79.1 million | $74.1 million | +6.7% |
| Operating margin | 9.7% | 11.2% | Down 150 basis points |
| Net income attributable to MAXIMUS | $58.7 million | $55.9 million | +5.0% |
| Diluted EPS | $0.91 | $0.86 | +5.8% |
| Cash flow from operations | $87.3 million | $59.3 million | +47.1% |
| Free cash flow | $76.8 million | $53.9 million | +42.4% |
Effective income tax rate was 26.0%, compared with 26.2% in the prior-year quarter. The company paid a quarterly dividend of $0.28 per share and declared a subsequent $0.28 per-share dividend payable February 28, 2020.
At December 31, 2019, cash and cash equivalents were $149.5 million, or $160.9 million including restricted cash. Billed and billable receivables were $511.7 million and unbilled receivables were $123.4 million. Days sales outstanding was 71 days, within management’s 65-to-80-day target range.
The company had no borrowings under its $400 million revolving credit facility at quarter-end. Current debt and other borrowings were $7.0 million; management stated that remaining debt primarily consisted of short-term foreign borrowings. Operating lease liabilities totaled $207.2 million after adoption of the new lease standard.
Material changes versus the prior comparable period
- Revenue growth was substantially driven by the November 2018 acquisition of the General Dynamics Information Technology citizen engagement centers business and growth in its federal contracts. On a pro forma basis, revenue increased 7.2%, including 5.0% growth from acquired citizen engagement center contracts and 2.1% organic growth from other contracts.
- U.S. Federal Services revenue increased 69.0% as reported, or 16.2% on the company’s pro forma comparison. The Census Questionnaire Assistance contract contributed approximately $70 million of Q1 FY2020 revenue.
- U.S. Health and Human Services revenue increased 6.1% organically, but segment gross margin declined to 28.7% from 29.9%.
- Outside the U.S. revenue declined 9.2%, or 8.0% on a constant-currency basis. Segment operating income declined to a $1.0 million loss from $4.4 million of income, reflecting low unemployment, difficult market conditions, Australian bush fires, currency effects, and related operating challenges.
- Gross and operating margins declined as revenue mix shifted toward lower-margin federal work, the Outside the U.S. segment weakened, and amortization increased following acquisitions. Amortization of intangible assets rose to $9.1 million from $5.5 million.
- Cash flow improved substantially because of the acquired business, stronger collections, and payroll timing. The prior-year period included $421.8 million of acquisition cash outflow; no comparable acquisition payment occurred in Q1 FY2020.
- On October 1, 2019, MAXIMUS adopted ASC Topic 842 for leases, recognizing a $214.5 million lease liability at adoption. The company did not recast prior periods, and management reported no material effect on earnings or cash flows.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects U.S. Health and Human Services operating margins of approximately 17% to 18% in fiscal 2020.
- Management expects U.S. Federal Services operating margins of approximately 9% to 10% in fiscal 2020.
- The Census Questionnaire Assistance contract is expected to generate approximately $360 million of revenue in fiscal 2020, compared with less than $50 million expected in fiscal 2021, creating a significant year-over-year comparison risk.
- The company targets a total-company operating margin range of 10% to 15% and emphasizes high cash conversion, a healthy balance sheet, and acquisition capacity. The filing does not provide a specific consolidated fiscal 2020 revenue or earnings forecast.
- Outside the U.S. operations remain exposed to low unemployment, Australian natural-disaster disruption, coronavirus-related travel restrictions, foreign exchange movements, and post-Brexit political and economic uncertainty.
- MAXIMUS faces risks related to government budget changes, contract termination, performance requirements, audits, pricing, cybersecurity, personnel retention, regulatory compliance, litigation, and acquisition integration.
- Two proposed CMS Medicaid disallowances total approximately $31 million. MAXIMUS believes its exposure is limited primarily to fees earned and that school districts should bear the remainder; it has reserved its estimated fees. No legal action had been initiated as of the filing.
- The company repurchased 26,000 shares for $1.9 million during the quarter, with $144.1 million remaining under the authorization at December 31, 2019. It subsequently repurchased an additional 30,000 shares for $2.2 million.
- Remaining performance obligations were approximately $300 million, with approximately 60% expected to be recognized within twelve months, subject to stated exclusions and estimates.
Important facts for investors to verify
- Whether federal contract growth, particularly Census Questionnaire Assistance work, offsets the expected fiscal 2021 revenue decline.
- Whether U.S. Federal Services can sustain its expected 9%–10% operating margin as acquired contract volumes change.
- Whether the Outside the U.S. segment returns to profitability amid labor-market, Australian, currency, coronavirus, and post-Brexit pressures.
- The sustainability of the reported cash-flow improvement, including the effects of payroll timing and working-capital collections.
- The ultimate resolution and financial exposure from the approximately $31 million Medicaid disallowances.
- The effect of lease liabilities, acquisition-related amortization, and future accounting standards on reported leverage, margins, and earnings.